Following the guidelines published by EIOPA last 6 July 2022 on the evaluation of Technical Provisions (TP) and the identification of Contract Boundaries (CB) under the SII framework, last 22 December 2022 the Italian Insurance Supervisory Authority, IVASS, published the Consultation Document no. 10/2022, that amends the Regulation no. 18/2016 concerning the application rules for the TP calculation. Any comment from the industry shall be sent to IVASS by next 20 February 2023 and once the consultation phase will be over, the comments received and the consequent resolutions by IVASS will be shared to the public.

The final goal of the consultation document is to avoid an unlevel playing filed, characterized by several divergent practices adopted by the industry in the TP evaluation. To this aim, IVASS clarifies topics such as

• Contractual Boundaries (CB)
• Assumptions and Expert Judgment (EJ)
• Expense modelling and allocation
• Dynamic Policyholder Behaviour (DPHB)
• Future Management Actions (FMA)
• Time Value of Options and Guarantees (TVOG) and Economic Scenarios Generators (ESG)
• Expected Profits In Future Premiums (EPIFP)

CONTRACTUAL BOUNDARIES

Contract Boundaries (CB) determine the premiums and obligations that belong to the contract, considering rights and risks for the undertakings. In Title II (General principles and application rules for the TP calculation), Chapter I (Recognition of Obligations), Art. 7 has been amended to clarify that a contract can be unbundled if and only if two (or more) parts of it are equivalent in terms of risk to two (or more) contracts that could be sold separately; while Art. 8bis and 8-ter have been inserted to regulate that a financial guarantee / coverage has a discernible effect on the economics of a contract only when linked to the payment of future premiums, providing the policyholder with a discernible financial advantage. The assessment, either qualitative or quantitative, should compare the present value of the expected cash flows of the contract with and without the financial guarantee / coverage and should appraise when the difference is discernible. When the benefits depend on the market returns, for sake of comparison, the risk-free yields shall be adopted without Volatility Adjustment (VA) or Matching Adjustment (MA) and a stochastic evaluation shall be carried out. Finally, Art. 8-quarter has been inserted to clarify that CB are expected to remain constant, however a reassessment can be triggered by changes in the contract terms or the relevant external environment. To ensure coherency in the evaluation, CB should remain constant through all the scenarios of the stochastic valuation, as well as in the stressed scenarios adopted for the SCR calculation.

ASSUMPTIONS AND EXPERT JUDGEMENT (EJ)

EJ is widely used by the undertakings when setting assumptions for valuation purposes and can modify the results in a sensible manner. Therefore, in Title II (General principles and application rules for the TP calculation), Chapter IV (Assumptions underlying the TP calculation), Art. 30-bis, 30-ter, 30-quarter, 30-quinquies, 30-sexies have been inserted to clarify that, from a corporate governance profile, the usage of EJ shall be commensurate to the resulting impact (also considering extreme scenarios not yet experienced by the undertaking), and shall follow a validated and well documented process (strengthened, when appropriate, by stress tests and sensitivity test), where the assumptions shall be defined following criteria that do not change over time, adapted to the usage they are intended for and approved at a sufficiently high hierarchical level, according to their relevance (it must be clarified how much the uncertainty around the assumptions can vary the final outcomes). The assumptions definition, together with the EJ adopted, shall be documented in a transparent manner, describing the methodologies, the panel of experts and the period of validity and any material deviation from actual data or previous settings. Finally, the undertaking should also identify potential situations where the assumptions would not be valid.

EXPENSE MODELLING and ALLOCATION

In Title II (General principles and application rules for the TP calculation), Chapter IV (Assumptions underlying the TP calculation), Art. 32-bis has been included to clarify that administrative and trading expenses shall be considered in the projection and the reimbursements of investment management expenses shall be considered as other incoming cash flows (and other outcoming cashflows in case the reimbursement is shared with the policyholders or other third parties). Art. 35 has been integrated to specify that general expenses shall be projected in a realistic manner, consistent over time, in coherence with a long-term commercial strategy; Art. 37 has been integrated to regulate the usage of inflation to increase the costs over time.

DYNAMIC POLICYHOLDER BEHAVIOUR

In Title II (General principles and application rules for the TP calculation), Chapter V (treatment of financial guarantees and contractual options), Art. 41-bis, 41-ter, 41-quarter have been inserted to regulate the need of defining the assumption based on both statistical evidence (when representative of future conduct) and a sound EJ (if needed). Lack of data in extreme scenario shall not prevent the undertaking from assuming the option to be exercised. The dependency on the trigger event and the exercise rate of the option is bidirectional: both increases and decreases shall be considered. Finally, all relevant contractual options shall be considered, including the option to pay additional premiums (top ups) or to vary their amount

FUTURE MANAGEMENT ACTIONS (FMA)

In Title II (General principles and application rules for the TP calculation), Chapter VI (Future Management Actions and hypothesis on future profit sharing), Art. 42-bis, 42-ter have been introduced to regulate the need of formalization for the process that defines the FMA and their relations with the new business. Specifically, the FMA plan, approved by the administrative, management or supervisory body, shall be either in the form of a single document or a set of documents accompanied by an inventory, where all the assumption for the FMA used in the Best Estimate calculation are reported. Realistic assumptions on NB and on other related topics (asset allocation, profit sharing or duration gag) shall be considered and shall not be influenced by the application of contract boundaries.

TVOG and ECONOMIC SCENARIO GENERATOR

In Title III (Methodologies for the TP calculation), Chapter I (Assessment of proportionality), Art. 44 has been amended to better define the principle of proportionality, that shall not materially change the value of the liabilities. In Chapter III (Methodologies for the evaluation of contractual options and financial guarantees), Art. 52-bis has been inserted to regulate the need of stochastic evaluations in presence of any kind of profit-sharing mechanism with future benefits depending on the return of the assets and in presence of other financial guarantees (like technical rates), even more so when combined with options (like surrender options), whose dynamic modelling increases the value in extreme scenarios. Finally, in Chapter IV (economic scenario generators), Art. 56-bis has been inserted to regulate that the ESG modelling adequately reflects the volatility of the assets by considering all the relevant sources of volatility, including spread risk and default risk and negative interest rates.

EXPECTED PROFITS IN FUTURE PREMIUMS

In Title III (Methodologies for the TP calculation), Chapter IX (expected profits in future premiums), Art. 75 has been amended to clarify that when calculating the EPIFP all the assumptions (mortality, lapse, expenses, DPHB, FMA, …) shall remain unchanged, but the expectation to receive future premiums, that must be nullified (consequently, the volumes of some expenses may be influenced); Art. 75-bis has been inserted to regulate that an alternative calculation can be adopted, if a similar result is provided.

Reference:

• IVASS, Documento di consultazione n. 10/2022, 22 December 2022